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Tesla announces deal for Shanghai factory

11 July 2018

China raised its tariff on auto imports from the U.S.to 40 percent in retaliation against the Trump administration's decision to put additional duties on Chinese-made goods, forcing Tesla to raise prices on its electric vehicles there. Tesla sales in the China market have also slowed considerably.

As the trade war between the us and China (as well as the rest of the world) escalates, Tesla announced Tuesday an agreement with Chinese officials to build a new factory in Shanghai, reports Reuters.

Musk was in Shanghai Tuesday, and the Shanghai government in a statement said it welcomed Tesla's move to invest not only in a new factory in the city, a center of the Chinese auto industry, but in research and development, as well. Tesla can start to produce and provide its vehicles for the Chinese market while Shanghai will benefit from thousands of new jobs, local companies receiving new orders from Tesla, and a general boost to the local economy any major business investment brings.

Tesla chief executive Elon Musk will meet with Chinese officialsBeijingnghai and Baijing this week.

The advantages for Tesla for a large local production facility are pretty significant: China is banking heavily on "new energy" vehicles - hybrids and electrics - and demand for such vehicles is expected to grow substantially in the next decade. A Tesla representative in China didn't immediately respond to a request for comment.

The announcement came just as Tesla raised prices on its vehicles in China to offset the cost of tarrifs imposed by the Chinese government in retaliation for U.S. tarrifs recently levied on Chinese goods. That's a critical data point for Tesla, which has been burning through cash as it tries to ramp up production of its Model 3 vehicle.

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In what is Tesla's biggest step yet into an overseas market, the electric carmaker on Tuesday inked a deal to begin construction of a manufacturing plant in China capable of producing 500,000 cars a year.

At the top of the range, the most expensive Model X crossover is now 1.57 million yuan ($240,000) up from about 1.32 million ($200,000) before. Musk mentioned in an earnings call that a China factory would be the only way for Tesla to compete with the prices of China's local electric vehicle makers. But Tesla wanted to have full ownership of the future factory.

Other automakers long ago capitulated to China's strict foreign ownership requirements for auto factories, requiring U.S. companies to establish 50:50 joint ventures with local firms to build cars in the world's largest auto market. A plant in China also reduces shipping costs and potentially makes sourcing components more economical.

Tesla hiked prices in China over the weekend to a level more than 70 percent higher than in the United States amid mounting trade frictions between Washington and Beijing that have seen several USA imports, including cars, subjected to retaliatory tariffs of 25 percent.

A factory in China would also allow Tesla to operate free of various tariffs and other current and future trade measures between China and the USA, which are now moving in the direction of a trade skirmish if not an outright trade war. Musk's company got around the encouraged/required partnership with a local Chinese company by opting to build in Shanghai's free trade zone.

Auto brands in China are required to make electric vehicles at least 10 percent of their sales starting next year or buy credits from competitors that exceed their quotas.

Tesla announces deal for Shanghai factory